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REAL RIGIDITIES AND OPTIMAL STABILIZATION AT THE ZERO LOWER BOUND IN NEW KEYNESIAN ECONOMIES

Published online by Cambridge University Press:  22 June 2017

Adiya Belgibayeva  and
Michal Horvath
Adiya Belgibayeva
Affiliation:
University of London
Michal Horvath*
Affiliation:
University of York
*
Address correspondence to: Michal Horvath, Department of Economics and Related Studies, University of York, Heslington, York YO10 5DD, UK; e-mail: [email protected]
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Abstract

The paper revisits the literature on real rigidities in New Keynesian models in the context of an economy at the zero lower bound. It identifies strategic interaction among price- and wage-setting agents in the economy as an important determinant of both optimal policy and economic dynamics in deep recessions. In particular, labor market segmentation is shown to have a significant influence on the length of the forward commitment to keep interest rates at zero, the magnitude of the fiscal policy responses as well as inflation volatility in the economy under optimal policy.

Keywords

Zero Lower BoundStrategic ComplementarityLabor MarketInflationIncome TaxGovernment Spending
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 4 , June 2019 , pp. 1371 - 1400
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We are grateful for the comments received at various stages from Guido Ascari, Martin Ellison, Campbell Leith, Charles Nolan, Antonio Mele, Ioana Moldovan, Neil Rankin, Tim Willems, Simon Wren-Lewis, Francesco Zanetti, and two anonymous referees. We would also like to thank Taisuke Nakata for his help with the solution methodology.

References

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